Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Sunday, July 08, 2012

While Endorsing Proxy Advisory Services as Useful, Global Corporate Governance Group Calls for More Transparency

Proxy advisors provide a useful service to shareholders voting their
shares cross-border but the service could be more useful if proxy advisory firms
were more transparent about their
analytical methods and conflicts of interest, said the International Corporate
Governance Network in a comment letter to the European Securities and Markets
Authority. According to the global network, one way to increase transparency
would be the development of a code of conduct for proxy advisory firms.

Disclosure is a key element to understanding and governing the role of
proxy advisors as intermediaries between investors and issuers. It would thus
be beneficial if voting guidelines were made available. In addition, the level
of engagement between proxy advisors and companies needs to be made
transparent.

Proxy advisory
firms also need to disclose any additional services that are bundled with proxy
voting services, which could affect the neutrality and objectivity of voting
advice. However, the group would not impose a duty on proxy advisors to provide
research results to issuers systematically since this could undermine their
independence. It is also important to
keep in mind that most proxy advisory firms implement customized policies on
behalf of some of their clients, noted the group, and this research should
remain proprietary information of those clients.

The global network
also cautioned against overstating the influence of proxy advisory firms. There
is no direct correlation between proxy advice and voting outcomes, said the network,
adding that institutional investors often use several other sources of
information and there can be various reasons to agree or disagree with a
proposal. In addition, there are many institutional
investors that vote all shareholder meetings based on their own voting
policies. This means that these shareholders do not blindly follow the standard
proxy advice, reasoned the corporate governance group, but instead have their
own customized policy implemented in the voting system, which reflects the
investment philosophy of the institutional investor.

Finally, the
network emphasized that the use of proxy advisors does not induce a risk of
shifting the investor responsibility.
Proxy advisors only provide recommendations, observed the group, while
the ultimate decision remains with the institutional investor. At the end of the
day, institutional investors remain accountable for the way they fulfill their own
fiduciary duty towards the ultimate beneficiaries.